Federal Reserve Chairman Powell is preparing to testify before the Senate Banking, Housing and Urban Affairs Committee on March 7, 2024.
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Faced with stubborn inflation that has raised concerns about the direction of policy, the Fed has fallen into on-hold mode, which could be reflected by the end of Wednesday.
The market expects that the possibility of the Federal Open Market Committee, the policy-making body of the Federal Reserve, announcing changes in interest rates is almost zero. That would keep the Fed’s key overnight borrowing rate in a target range of 5.25%-5.5% for potentially months or longer.
Recent comments from policymakers and Wall Street suggest there is currently little the committee can do.
“Almost everyone on the FOMC is now speaking from the same script,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “With one or two exceptions, policymakers generally believe that the past few “Month’s inflation data are too warm to justify action in the short term, but they still hope to cut rates later.”
The only news that may come out of the meeting itself is that the Fed will soon reduce the level of bond holdings on its balance sheet and then end the “quantitative tightening” process.
Beyond that, the focus will be on interest rates and the current reluctance of central banks to make concessions.
lack of confidence
Officials from Chairman Jerome Powell to regional Federal Reserve presidents have said they do not expect to begin cutting interest rates until they are more confident that inflation is moving in the right direction and back to the 2% annual target.
“We said at the Federal Open Market Committee (FOMC) that we need to have greater confidence that inflation will continue to move towards 2% before easing policy appropriately,” he told the central bank meeting. “Recent data clearly did not give that confidence.” Our greater confidence, instead, suggests that achieving that confidence may take longer than expected.”
Markets have actually been doing well since Powell made those comments on April 16, despite a sell-off on Tuesday ahead of the meeting.this Dow Jones Industrial Average It even rose 1% during the period, with investors seemingly willing to accept the prospect of a longer-term higher interest rate environment.
But there is always the fear that the unknown may emerge.
That likely won’t happen during the business portion of the FOMC meeting, as most observers believe the committee’s statement will be little or no change from March. However, Powell has surprised markets in the past, and his comments at the press conference will be scrutinized for how hawkish the committee members’ views are.
“I doubt we’re going to get something that really surprises the market at pricing,” Lebas said. He said Powell’s comments “make it very clear that we have not reached the threshold of further significant evidence of cooling in inflation.”
There is a wealth of recent data supporting this position.
The personal consumption expenditures price index released last week showed that if all items are included, the annual inflation rate is 2.7%; if food and energy are excluded, the most important core indicator is 2.8%. Fed officials prefer the Commerce Department index as a better indicator of inflation and focus more on the core index as a better indicator of long-term trends.
On Tuesday, the U.S. Department of Labor released more evidence, saying its employment cost index rose 1.2% in the first quarter, up 0.3 percentage points from the previous period, ahead of Wall Street expectations of 1%.
Neither of those numbers is in line with the Fed’s goals and could prompt Powell to be cautious about the direction of policy and underscore the bleak outlook for rate cuts in the short term.
One less thing, wish for more
The futures market is pricing in only about a 50% chance of a rate cut as early as September, with a rate cut currently expected to be just a quarter of a percentage point by the end of 2024, according to closely watched data from CME Group. Fed Watch measure.
Still, some on Wall Street remain hopeful that inflation data will show progress and allow the central bank to cut interest rates.
Goldman Sachs economists said: “While the recent rise in inflation has unexpectedly narrowed the path for the Federal Open Market Committee (FOMC) to cut interest rates this year, we expect the upcoming inflation report to be softer and still expect rate cuts in July and November. , although even a modest upside surprise could further delay a rate cut.
Economists at the Wall Street bank are preparing for the possibility that the Fed may be on hold for longer, especially if inflation continues to unexpectedly rise higher. Additionally, they said the prospect of higher tariffs after the presidential election, favored by Republican candidate former President Donald Trump, could stoke inflation.
In addition, Goldman Sachs is among a growing number of people on Wall Street who believe that the Federal Reserve’s March forecast of long-term “neutral” interest rates (neither stimulus nor restraint) of 2.6% is too low.
However, the company also doesn’t think a rate hike is coming.
“We still think a rate hike is unlikely, as there are no signs of a real recovery and funds rates are already quite high,” Mericle said. “It would likely take a severe global supply shock or a severely inflationary policy shock to lift the rate.” information becomes a reality again.”
Expand QT
One of the things the Fed is likely to make at the meeting is an announcement about its balance sheet.
The central bank is allowing up to $95 billion in maturing Treasury and mortgage-backed securities to be rolled over each month rather than reinvesting the proceeds. This operation reduced the Fed’s total holdings by approximately $1.5 trillion.
Officials discussed reducing runoff “by approximately half from recent rates” during the March 19-20 meeting, according to meeting minutes.
As the Fed reduces its holdings, banks will theoretically have fewer reserves held at the Fed as institutions put their money elsewhere. However, a lack of Treasury issuance this year as banks park funds at the Fed has caused reserve levels to rise by about $500 billion since the beginning of the year, to $3.3 trillion. If reserve levels do not decline, policymakers may be prompted to extend quantitative easing.
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